Financial Services claims

Expert risk article | May 2021
  • AGCS analysis of financial services insurance claims shows cyber incidents, including crime, ranks as the top cause of loss according to value.
  • Growing compliance risk a concern as compliance issues are already one of the biggest drivers of claims. Violations can be contributing factors to each of the top 10 causes of loss by severity.
  • Covid-19 claims activity to date limited. However, uncertainty over the pandemic and economic fallout continues to pose a risk for lending institutions.

Insurers continue to see large claims among financial institutions relating to compliance and increased regulatory activity. Despite operating in Covid-19 conditions, the US Securities and Exchange Commission [1] (SEC) collected a record $4.7bn in fines in fiscal 2020 across 715 separate cases, including foreign bribery charges, disclosure and accounting violations and misconduct.

The compliance burden for financial institutions has increased significantly over the past decade in particular. Regulatory enforcement has intensified as banks and senior management are more readily held to account by regulators and prosecutors, as well as shareholders. At the same time, they are subject to a growing bank of rules and regulations in a diverse range of areas, including sanctions, whistle blowing, data protection and cyber security laws, as well as a host of environmental, social, and governance (ESG) requirements.

“Compliance issues are one of the biggest drivers of insurance claims for financial institutions,” says David Ackerman, Global Claims, Key Case Management at AGCS. “They operate in challenging times, with technological changes and shifting political and regulatory developments. Keeping abreast of compliance in a rapidly-changing world is a tough task for companies and their directors and officers.”

“Compliance challenges have been an ongoing issue for financial institutions since the global financial crisis of 2008,” adds Shanil Williams, Global Head of Financial Lines at AGCS. “Their compliance burden is enormous, and is now accompanied by growing regulatory activism, legal action and litigation funding.”

AGCS has received claims notifications related to Covid-19 in the US and elsewhere, although, at the time of writing, the pandemic has not yet given rise to large numbers of financial lines insurance claims overall, in part due to government support and stimulus packages, and the dramatic recovery of stock markets in 2020.

To date, any claims against financial institutions related to the pandemic have emerged in only a few distinct areas: non-payment of business interruption claims by insurers and claims against banks relating to their administration of loans under the US Cares Act Paycheck Protection Program (PPP). A smaller number of claims have also been made by investors against asset managers alleging they failed to disclose risks associated with the pandemic or reacted adequately to Covid-19 risks.

However, uncertainty over the pandemic and economic fallout continues to pose a risk for lending institutions, says David Ackerman, Global Claims, Key Case Management at AGCS.

Economic downturns and insolvency are typically a driver for financial institutions claims, as shareholders, customers and insolvency practitioners seek to recoup losses. Insolvency related claims against directors and officers and under professional indemnity insurance are expected, although government support during the pandemic has softened the impact of Covid-19 and kept the number of insolvencies down to date, Ackerman explains.

“Covid-19 is the systemic loss event of the moment. We have had claims notifications, but the pandemic has yet to generate losses of consequence. However, we are not out of the woods yet, and it is not clear how deep or broad the economic downturn is,” says Ackerman. “Insolvency claims have yet to materialize, as was first anticipated, but they may yet do so as government support for the economy and business is unwound. “If there were substantial amounts of unsecured debt on banks’ balance sheets, we could see shareholder class actions and regulatory activity if financial institutions were themselves to struggle. Potentially, we could also see claims against investment managers where they have failed to advise investors and where customers suffered losses to their portfolios.”

Claims against directors and officers arising out of underlying prosecutions of banks have become a significant severity driver, explains Ackerman. In particular, the insurance market has seen a number of very large claims against directors and officers that have arisen out of investigations and prosecutions for sanctions breaches in the US. Enforcement of the Foreign Corrupt Practices Act (FCPA) continues to be a high priority area for the SEC, which last year agreed to a $3bn settlement with Goldman Sachs in connection with Malaysia Development Berhad bribery charges.

Mergers and acquisitions and initial public offerings have also generated large claims in recent years, as have money laundering, tax and accounting fraud, currency cartels and collusion, and large insolvencies. In 2019, the European Commission fined five banks (Barclays, RBS, Citigroup, JPMorgan and MUFG) €1.07bn for operating cartels in the foreign exchange markets – the banks also faced a  $1bn class action in the UK linked to the scandal.

Typically, large compliance claims are long tail – they can last upwards of 10 years – and involve complex regulatory investigations, prosecutions, large fines or settlements, and potentially shareholder derivative actions, says Ackerman.

Securities class actions are being filed in record numbers, rising steadily over the past 10 years. There were a record 268 US class action filings in 2019, although this fell to 210 in 2020, with financial institutions among the top three most targeted sectors, according to law firm Woodruff Sawyer [2]. However, this still exceeded the 10-year average by 13%. Shareholder class actions have also been on the rise in the UK, Canada and Australia (according to a report by broker Marsh [3] in 2018, the average number of securities class action claims lodged per year in Australia increased four-fold in 10 years), and to a lesser extent in Europe. Increasing frequency and severity of derivative actions against directors and officers of financial institutions and consumer/customer class action claims is also concerning, according to Ackerman.

“We are seeing more claims made against directors on behalf of the institution, looking to recover damages due to the failure of directors and officers to exercise their duty, for example, in areas like sanctions. In addition, derivative actions by shareholders following a regulatory investigation did not historically result in large losses, but this is no longer the case. In a number of countries – including Australia and Israel – we have seen large claims from derivative actions,” says Ackerman. 

Mis-selling is another big driver of claims in recent years. A number of countries have experienced scandals related to financial services, such as insurance, investment products and loans. “There is severity of claims for mis-selling in insurance and investment management, where firms have been accused of not providing appropriate advice, or wrongly charging for products,” says Ackerman.

“The insurance industry saw a large number of claims notifications in Australia following the findings of the Royal Commission into Misconduct in the Banking, Superannuation And Financial Services Industry but this is not a problem that is unique to Australia,” says Ackerman. Systemic or aggregate claims remain the biggest cause of loss. Events such as a financial crisis or the Covid-19 pandemic or market-wide compliance or conduct issues can lead to losses across companies, geographies and lines of insurance business.

“There have been a number of systemic events to hit the financial institutions sector that have caused significant insurance losses, such as claims against directors and officers for compliance breaches at banks or claims that have arisen from sanctions breaches,” says Ackerman.

AGCS is also seeing a growing number of insurance claims linked to the sector’s reliance on technology, such as claims arising from electronic exchanges, data breaches and cyber crime.

“The world is changing rapidly with the growing use of data and technology,” says David Ackerman, Global Claims, Key Case Management at AGCS. “One area in which we have seen an increase in the frequency of claims is through the use of technology by criminals to steal money or commit fraud. We are also seeing increasing regulation around technology, and data protection and privacy in particular. Insurers have already seen a number of claims made against directors following major privacy breaches,” says Ackerman.

In particular, AGCS has seen a number of sizable claims related to fraudulent payment instructions and “fake president” scams. Often, these claims will involve a degree of human error or compliance failings on the part of bank employees, such as the failure to properly evaluate whether a payment is valid, explains Ackerman. “In one recent claim, the policyholder satisfied a payment instruction, unaware that criminals had monitored its electronic communications, before sending a fraudulent payment instruction. Unfortunately, the bank’s employee made the transfer without making the call to validate that the payment request was legitimate.” The payment was in the “several millions of dollars”.

AGCS has also handled a number of liability claims arising from technical glitches with exchanges and electronic processing systems. “We have seen claims where systems have gone down and clients have not been able to execute trades, and have made claims against policyholders for loss of opportunity. We have also had claims where a system’s failure has caused damages to a third party,” says Ackerman. “In one claim, a fault in an electronic system caused significant currency valuation losses for users. In another incident, one financial institution suffered a significant loss after an electronic trading system crashed following a major revamp, causing processing failures for customers.”


[1] US Securities And Exchange Commission, 2020 Annual Report, Division of Enforcement
[2] Woodruff Sawyer, 2020 Securities Class Actions Exceed the 10-Year Average, January 2021
[3] Marsh, Shareholder class actions shaping the future of Australia’s D&O insurance landscape, August 2018

Photo: Adobe Stock

Keep up to date on all news and insights from Allianz Commercial